I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Greece Has A Primary Surplus: Now's The Time To Default On That Debt

Budget data from Greece’s central government showed Monday a primary surplus for the first seven months of the year, turning around a steep deficit seen the previous year, according to the country’s Finance Ministry.

The data showed that the primary surplus reached €2.6 billion ($3.47 billion) against a deficit of €3.1 billion a year earlier.

The data, which don’t include payments on debt interest, local government and social security fund budgets, show that Greece is likely to secure a primary budget surplus for the year, for the first time in more than a decade.

I’m sure that most will read this as excellent news. Greece can start paying back its debts now and everyone’s money lent to them is much safer than it was. But that’s not how it works I’m afraid. Or at least potentially that’s not how it could work.

If you are running a primary deficit then you don’t have the luxury of being able to simply default on all of your debts. For you’re having to borrow to meet your pensions, social security, defence and so on spending. If you default you’ve still got to find the money from somewhere to keep the old folks and the soldiers paid: so you’ve either got someone to lend to you immediately after you’ve just defaulted or, you’ve got to cut somewhere else in the budget. Given that no one will lend to you immediately, you’ve got to do that cutting. But if you don’t default you can borrow the money and pay the soldiers etc.

With a primary deficit you’re therefore rather a prisoner of those lending you money. This is why Greece agreed to the last renegotiation of the debt. It didn’t actually solve the problem. For only private sector holders of the debt lost money: none of the official holders did (other EU countries, the ECB, IMFIMF and so on). And so much of the debt was in the hands of the official creditors that near wiping out those private sector ones still didn’t solve the basic problem. Greece has too much debt to ever be able to pay it back.

This all changes when you move into a primary surplus. Sure, you’ve still not got enough money to pay all of your bills. But you can pay the ongoing cost of running the government and the country. The part you cannot pay is the interest on all that money you’ve borrowed. At which point a unilateral default begins to look very attractive indeed. We don’t need to borrow more to pay the pensioners and the soldiers. We’re only borrowing more to pay the interest on what we’ve already borrowed. If we just tell all those we’ve borrowed money from that we’re not going to pay then our budget problems are over.

And yes, sovereign countries do indeed have the ability to do that. It’s happened many hundreds of times over the centuries (800 times in fact and Greece has done it for 50% of the time since it became an independent nation in the 1820s).

The really key point here is that, in the circumstances of a heavily indebted nation, moving from primary deficit to a primary surplus actually increases the room for policy choices. Up to and including making outright default a more attractive proposition.

Myself, as a purely personal opinion, I think that Greece should default: as I’ve been arguing for some years now, I think that several of the most heavily indebted EU states should. But I agree that that’s a somewhat extreme view. My point here though is that if you want to default it’s something that’s very difficult to do when you’re running a primary deficit. It becomes very much more attractive when you’re running a primary surplus. Which means that Greece now has rather more policy options as it discusses what will happen next. Which is all to the good: a more even handed distribution of power is likely to lead to a much better outcome for Greece and its people. Until now they’ve had to do what they’ve been told to do, sign up or else. Now their own negotiators have an “or else” of their own.

Diego Iscaro, a senior economist at IHSIHS Global Insight, described the figures as being positive for Greece. He said that “reaching a primary surplus will be key to unblock further support from its euro-zone peers.”

“On this regard, we expect a decision during the second quarter of 2014,” Mr. Iscaro said.

However, Germany’s finance ministry stuck with its steadfast rejection of further debt relief for Greece, following a weekend report in news magazine Spiegel suggesting the country’s central bank expects a new Greek aid package will be necessary by the beginning of next year at the latest. The Bundesbank declined to comment on the report.

With less than six weeks to go until nationwide elections in Germany, a spokesman for the German finance ministry told reporters “a second haircut [on debt] is out of the question.”

If Greece now has the possibility of unilateral default in its armoury of possible responses I have a feeling that a further haircut or not isn’t going to be something that the German Finance Ministry gets to decide upon. Not on its own it doesn’t, at least.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Very informative article. However, I believe you may be assuming that the Greek government acts as an advocate for its people. That is an understandable assumption. One would expect a government to have its people as its priority. However, this is not the case with the political leaders in Greece. I predict that they will execute the austerity measures even more zealously than before. Whether they act this way because they have bought into the ideology of neo-liberalism or for some other reason, I do not know.

Just to clarify my comment– I don’t think they will engage in any type of hard negotiations about the debt. They are on board with whatever the IMF, EC, and ECB tell them. The possibility that people in Greece can survive without the next bailout is not something that will be reported in the press in Greece. The debt gives the government a convenient excuse to push the austerity agenda.

The Greek government’s claim that they have a 2.6 Billion surplus is very misleading. The bank of Greece came out with different figures today claiming that there is actually a primary deficit of 7.9 billion euros. The Greek government forgot to mention that they still ‘owe’ the private sector 8 billion euros in tax returns and suppliers of the private sector. They did not include local government expenses since everyone knows that local government in Greece is just a huge black hole of taxpayers waste.